DBS Dents Mediacom

Stiff competition from direct-broadcast satellite spurred greater than expected second-quarter subscriber losses for Mediacom Communications Corp., forcing it to revise its revenue and cash flow guidance downward for the year.

The Middletown, N.Y.-based MSO lost about 24,000 subscribers in the second quarter, compared to a decline of 15,000 customers in the second quarter of last year, mainly because of aggressive discounting and increased local-to-local offerings by DBS competitors.

Adding to the decline was the implementation of its annual rate increases and the traditional subscriber losses as college students and other transients left home for summer residences.

Investors appeared spooked by the declines, driving Mediacom stock down 14% ($1.24 each) to $7.61 in 4 p.m. trading last Wednesday.

In a conference call with analysts last Wednesday, Mediacom chairman Rocco Commisso said the losses were continuing in July, forcing the company to revise its revenue and cash-flow growth numbers for the full year.

Lowered guidance

Mediacom said 2003 revenue growth would be between 8.5% and 9%, compared to the previously forecasted 10% to 11%. Operating cash-flow growth for the year would fall between 8% and 9%, instead of 11.3% to 12.3%.

Basic-subscriber guidance was reduced from 0% to a decline of 1% to a 2% decline.

"We knew at the start of 2003 that we would face challenges on basic subscribers due to the intentions of the satellite providers to launch local signals in certain of our markets," Commisso said on the conference call. "This scenario played out during the first quarter and well into the second quarter, but the competitive intensity stepped up a notch toward the end of the second quarter.

"We definitely saw aggressive competitive advertising promotional offers in new local-into-local markets, but the aggressive promotions have appeared in other areas as well, and have sustained into the third quarter," he continued. "This situation — coupled with announced local-into local launches by satellite providers in other markets of the company in the second half — has caused us to take the prudent approach and reduce our guidance or basic subscribers, revenue and operating cash flow."

Mediacom has fought off its DBS rivals' aggressive marketing tactics in part with short-term pricing promotions, offering discounts for one or two months. While the hope is that Mediacom will transition those promotional customers into full-paying customers over time, the MSO is taking no chances.

"How are we responding? Our natural instinct is to lead with the bundle and emphasize the superiority and availability of our value-added offering," Commisso said. Mediacom also is spending additional marketing dollars to get that message out, he added, though it believes most of the DBS promotions are "irrational and unsustainable."

Mediacom also will continue its dish buy-back program, offering a $25 per month credit for 16 months. That initiative has won back about 3,000 customers in the second quarter.

The operator also hopes the subscriber declines will not last for long. On the conference call, senior vice president of marketing and consumer services John Pascarelli said that in the past, DBS providers have eased off on aggressive promotional campaigns after about three to five months.

"They spend a lot of money — they are attacking with different tactics, whether it's direct sales, telemarketing or door hangers — and then it starts to fall out," Pascarelli said. "It is an initial blitz and then it tends to come back and run normal with the rest of the marketplace."

The aggressiveness appears to come from individual satellite dealers, rather than a nationwide marketing push by the two largest DBS operators, DirecTV Inc. or EchoStar Communications Corp.'s Dish Network, Pascarelli added.

"The biggest thing that we saw different was the activity from a local dealer," Pascarelli said. "We've dealt with local-to-local, where they have a real good strong distribution chain and a local dealer who is very aggressive in spending money. That's where we got surprised."

Local landscape

DBS providers are also beginning to deliver local broadcast-TV stations into secondary markets, Commisso added. In the past, they had focused on larger cities.

"Our experience [with local-to-local] was pretty numb for two years," Commisso said. "They launched in some of our major markets two or three years ago, and then they stopped. It's only been in the last six to nine months they've stepped up launches in those markets below the top 50 DMAs."

On the call, Mediacom chief financial officer Mark Stephan said the MSO was hurt most by local-to-local launches in Des Moines and Cedar Rapids, Iowa, and Huntsville, Ala. He estimated that local-to-local availability across Mediacom's total footprint increased from 15% last year to 34% in the second quarter. Local-to-local coverage could reach 62% of Mediacom's total subscriber base by year-end, Stephan added.

Bundle battle

Commisso also plans to battle DBS by offering a full, three-product bundle of video, voice and data. Mediacom should launch a voice-over-Internet protocol telephony service by June of next year, he added.

Despite the basic losses, Mediacom had strong growth in digital and high-speed data customers — up by 11,000 and 20,000 subscribers during the period. Revenue rose 9.3% to $252.2 million, while operating cash flow was up 9.2% to $104.7 million, in line with most analysts' expectations.

Sayonara, Subs

The second quarter is traditionally a weak one for cable operators, as college students and other transients move to summer residences. Below is a snapshot of Mediacom's second quarter vs. first quarter subscriber losses over the past three years.